OPEC+ has decided to increase its oil production by 100,000 barrels per day, following yesterday’s meeting. This is the lowest increase in its history. At its previous meeting in June it agreed to raise production by 648,000 barrels per day.
Brent oil, which started yesterday’s trading at $100.54, shot up to $101.8 after the meeting. Meanwhile, WTI crude oil increased to 95.66 dollars from an initial 94.42 dollars. Here are the first reactions from international fund managers following the OPEC+ announcement.
Noah Barrett, Research Analyst – Energy & Utilities Sector Lead at Janus Capital Group
It was a pretty quick meeting of OPEC+ today, with an outcome that should be supportive of oil prices. OPEC+ agreed to increase production by 100kb/d in September and the increase will be split among member nations. Given that some countries are currently underproducing their quotas, this means that they may not be able to deliver on their portion of the 100kb/d September increase. So even though we see a headline increase of 100kb/d (which is fairly small), the actual supply increase may be even lower than that. The U.S. was probably hoping for a larger production increase, especially after Biden’s recent trip to the Middle East.
In terms of overall supply/demand management, OPEC’s decision is logical. There’s still a great deal of uncertainty on oil demand in the back half of this year, driven by questions around Chinese demand, and the potential for U.S. or even a global recession. Additionally, spare capacity remains tight; OPEC’s press release categorized spare capacity availability as “severely limited”, which also limits OPEC’s ability to bring a material supply increase into the market.
Randeep Somel, Fund Manager, Climate Solutions Fund at M&G Investments
With Democrats struggling with inflation at home and midterm elections due in November, President Biden arrived in Saudi Arabia in July hoping to mend relations with the world’s most important swing producer when it comes to the production of oil. A very public fist-pump between the two leaders suggested relations were thawing and Biden may be successful in convincing Saudi Arabia to produce more oil as the world struggles with climbing prices following the Russian sanctions.
OPEC and its allies today announced they will lift supply by just 100,000 barrels a day for September delivery. This is a tiny fraction of the group’s overall production and a far smaller increase than it has added in recent months, previously adding 648,000 barrels a day for August production. Globally we consume c. 100m barrels of oil per day.
With manufacturing and consumer confidence data showing weaker signs across the world, delegates said they are concerned by the threat to demand from a potential recession in the US and Covid-19 lockdowns in China.
It doesn’t look as if higher oil prices are going to be resolved by a supply response. The key factor now will be how resilient the global economy can be with higher oil prices and if inflation can be tamed despite energy prices remaining high. Otherwise, the only option central banks will have is to raise interest rates in order to curtail demand.
Longer term this further makes the case to continue to diversify our energy needs away from both hydrocarbons and authoritarian regimes.
While this will be a long-term endeavour, the recent proposals from both the EU (RePowerEU) and President Biden’s Inflation Reduction Act show the priority that domestically produced renewable energy continues to receive.